Can Asia escape global secular stagnation?

AS we settle down for the end of the year, the picture on the economic front seems to be a bit clearer, although on the political front, the Paris attacks, the downing of a Russian jet by Turkey and continuing refugee migration into Europe have escalated geopolitical risks.

By spreading the war on terror from 9/11 in New York to Paris, consumer confidence in Europe is likely to suffer, depressing already a weak recovery in Spain, Italy and Ireland.

Fed vice-chairman Stanley Fischer, one of the wisest and most experienced central bankers, gave a speech earlier this month in San Francisco on Emerging Asia in Transition. His view was surprisingly upbeat but clear-eyed, noting that a slowdown in Asia is not slow but still impressive. The pattern of growth in Asia has been quite consistent – a period of fast growth before deceleration to a moderate level, and when the economy reaches maturity, as in the case of Japan, a phase of slow growth or stagnation. Fischer explained the growth through two major drivers – trade and demographics.

Export drive: One of the reasons for the Asian success story was the export-driven manufacturing, creating he Asian global supply chain

One of the reasons for the Asian success story was the rise of export-driven manufacturing, creating the Asian global supply chain. But after the global financial crisis of 2007, imports from the advanced countries declined, which was compensated by China’s imports of commodities from the commodity producers.

But once the investment-led cycle in China turned, commodity prices declined sharply and today, demand from the emerging markets also came down. On top of weak demand in the advanced economies, this meant real weak aggregate demand in the world, facing a situation of huge excess capacity in manufacturing and commodity production.

Basically, despite massive monetary creation, the world is facing slower growth with very little inflation in sight, namely, secular stagnation. The second factor for the current situation is demographics. East Asia had a demographic dividend, as a flood-tide of young labour emerged even as global exports took off. But the advanced economies of East Asia are aging, just like the advanced countries of Europe. The 2015 UN World Population Projections show these trends starkly.

The two manufacturing powerhouses, Japan and Germany, have the highest median population age of 47 and 46, and by 2030, just under one in three persons will be over the age of 65. By that time, Korea, Hong Kong and Singapore population would have one in four over the age of 65.

China and the US share roughly the same population profile, with the median age of 37 and 38 respectively, but by 2030, 21% of the US population would be over the age of 65, still higher than the 17% in China.

On the other hand, the younger populations in India, Bangladesh, the Philippines, Indonesia and Malaysia still enjoy potential for high growth, with a median age of not more than 29 years and by 2030, less than 10% of the population would be more than 65. These large population countries, with the right infrastructure and policies, have the potential to grow above 5% per annum, with India leading the charge at 7.5%. We cannot underestimate power of these emerging population giants as new engines of grow.

India is today a US$2 trillion GDP economy, one fifth the size of China, with roughly the same population. When the Philippines and Vietnam (100 and 91 million population respectively) reach the same per capita income as Malaysia, their economy would be in the US$1 trillion class, roughly 3 times the size of either Singapore and Hong Kong today.

On the same basis, Indonesia would be a US$2.8 trillon economy, roughly the same size as France today. One of the factors weighing down markets is the trajectory of interest rates, which are still historically low. The Fed may be interested in raising them back to normal, but the European Central Bank and the Bank of Japan are still committed to quantitative easing.

Emerging market interest rates and corporate borrowing rates have already started rising worldwide and this is, in the short run, negative to growth recovery. However, getting these population giants to move beyond the middle-income trap require huge reforms in many areas, including the power to put in infrastructure, educate the labour force and deal with structural impediments.

Countries like the Philippines and Vietnam are using external pressure, such as signing up to the TransPacific Partnership, to push through reforms even as opportunities for more trade appear. But the headwinds against such reforms are not small. Each country faces its own set of internal obstacles. In some countries, it is antiquated labour and land laws, in others corruption, inefficient state-owned enterprises, and lack of much needed infrastructure. In many, the transaction costs of doing business remain too high to compete effectively. In others, domestic giants resist competition from foreign multinationals that can bring in new knowhow and markets.

At the same time, labour unions and fear for jobs resist the introduction of new robotics and labour and resource-saving technology. All these risk factors collectively produce a global secular stagnation trap, very much like the 1930s, when no single government was strong enough to pull the world out of the global depression.

The US today is no longer in the position to be the lead engine. Even though it is recovering, US consumers are spending less on hardware imports and more on domestic services. Hence, even if emerging markets cut exchange rates to defend their trade positions, the exorable rise in dollar exchange rates spell future trouble because there are limits to the growing size of US trade deficits.

What can Asian countries do to get out of the secular stagnation? The answer lies in the willingness to reform and to restructure the current overdependence on exports, debt and manufacturing/resource exploitation. The willingess to bite the bullet will produce a J-shaped recovery, rather than the current L-shaped stagnation.

But every leader knows that reform is politically unpopular because it hits various vested interests. So all pundits deplore the lack of leadership. Leadership in these times of transition requires guts and will. The only problem is that it often takes someone else’s guts and the need to write the reformer’s own political will.

By Andrew Sheng Think Asian

Tan Sri Andrew Sheng writes on Asian global issues.


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IMF Managing Director Christine Lagarde participating in the Asia Finance Conference at the Bank of Indonesia, in Jakarta, Indonesia on Sept 2, 2015. PHOTO: EPA

With a strong dollar and growing fiscal and trade deficits, small wonder that the markets are debating whether that engine is flying on empty

I was in Jakarta this week attending an IMF-Bank Indonesia conference on the Future of Asian Finance, the title of an International Monetary Fund (IMF) book launched last week with essays by IMF experts reviewing the lessons from the past and sketching how Asia can build its future, with a supportive financial system.

This is a very useful book, because it contains massive amount of helpful data and analyses for Asian policymakers to strategise how to respond to the current turbulence.

This weekend, the G20 Finance Ministers and central bank governors are meeting in Ankara, as Turkey takes the chair of G20 Presidency for 2015, with the key objectives of: strengthening global recovery and lifting potential; enhancing resilience; and buttressing sustainability.

Unfortunately, the current environment is heading in the opposite direction.

In the IMF Note for the G20 Meeting assessed that global growth for the first half of 2015 was slowing; financial conditions for emerging market economies have tightened; and risks are tilting towards the downside.

My interpretation is that basically what the IMF is saying is that if we are not careful, a perfect storm may be looming.

Understandably, the fund called for strong mutual policy action to raise growth and mitigate risks.

The real problem is that G20 members’ policy actions are likely to pull in different directions.

Sept 15 will be the seventh anniversary of the failure of Lehman Brothers, a landmark event, which triggered efforts to prevent global collapse that set up the greatest financial bubble in recorded history.

In the first half of 2015, almost every country witnessed record peaks in their stock markets, bond markets and real estate prices.

Given the fact that most countries are still slowing or having modest recoveries, this bubble has been pumped up by advanced country central banks in an activist monetary gamble called quantitative easing.

Indeed, the McKinsey Global Institute has warned that global credit and leverage is at its highest ever, and despite much soul searching about the need for macro-prudential regulation to prevent bubble risks, there has been not much deleveraging.

We have the odd situation whereby the governor of the Bank of England, currently chairman of the Financial Stability Board, warns about real estate bubbles, but hasn’t dared so far to raise interest rates in his own country.

The Fed has also anguished over whether to raise interest rates this month or in December. The polarity of debate is astonishing.

There are those who say that the US economy is now strong enough to take a 25 basis point interest rate increase, whereas authoritative figures like former Treasury Secretary Larry Summers have argued that another round of QE4 may be necessary to prevent “secular stagnation”.

When the Chinese authorities intervened in the A share market in August, the Financial Times and Wall Street Journal revelled at China’s debacle, only to wake up after their own markets, Dow, Nikkei and German Dax, witnessed the largest drops since 2011 after the announcement of the yuan devaluation of only 1.9%.

People in glass houses should not throw stones at each other, forgetting that other people’s misery, mistakes or misfortunes rebound on oneself.

The markets are not wrong to be nervous. The current global slowdown and turbulence is not the fault of any single country, but the result of a highly fragmented international financial system (IMS) being buffetted without a single monetary authority, fiscal authority or regulatory authority.

We have moved from a unipolar world to a multipolar casino where no one is fully in charge.

The IMS fragility stems from the fact that its inherent trade and debt imbalances, swing periodically to excesses without a coherent or single mechanism to control or moderate them.

Remember, the IMF is not the world’s central bank – that power was assumed by the leading sovereign central banks, particularly the US Fed. In 2005, then chairman Ben Bernanke complained that the Fed was losing monetary policy effectiveness because of excess savings by the surplus countries, notably China and Japan.

The United States can run ever larger trade deficits, because surplus countries are more than willing to hold dollars in their foreign exchange reserves.

The 2007/2009 crises erupted when the trade imbalances generated a second order imbalance with the United States and European banks expanding credit both off-balance sheet and off-shore in dollars and euro.

The complacency of their regulators allowed these banks to be excessively leveraged. Threats of raising interest rates caused a market reversal and illiquidity, leading to a crisis of confidence and collapse.

Seven years later, the advanced country central banks and regulators again crow that they have “fixed” the problems, but the markets are as fragile as ever.

They are held together because the central banks have emerged as not only lenders of last resort, but buyers of first resort at any sign of market tantrum.

The stark reality was that it was China’s massive reflation in 2009 that reduced its current account imbalances, increased commodity prices and pulled the world out of recession.

But that was at a cost of a huge internal credit binge. Now that China has taken a pause in growth and attempted to correct its internal imbalances, the rest of the world is taking fright.

When the underlying imbalances are correcting as is happening now, there are no excess savings and no excess credit – only the prospect of higher interest rates.

And higher interest rates mean the pricking of the global asset bubble.

In short, before 2007, the world was a four-engine jet, propelled by the United States, Europe, Japan and the emerging markets, led by China.

After 2009, when Europe and Japan slowed, it was a two-engine jet, with China helping the United States sustain growth and currency stability.

Since the United States and Japan are hesitant to want China to join the special drawing rights club, that second engine is being recaliberated.

The world is now flying on one engine, the United States and US dollar.

With a strong dollar and growing fiscal and trade deficits, small wonder that the markets are debating whether that engine is flying on empty.

And what is the Future of Asian Finance? Watch this space next.

By ANDREW SHENG .THINK ASIAN
Asia News Network
Andrew Sheng comments on global issues from an Asian perspective.

The writer, president of the Fung Global Institute, Hong Kong and the chief adviser to the China Banking Regulatory Commission, is a former chairman of the Securities and Futures Commission of Hong Kong.